What is petty cash?

Petty cash is a small amount of cash kept on hand to cover minor expenses. It's a convenient way to pay for things like:

Office supplies: Pens, paper, staples, etc.
Courier fees: Sending documents or small packages.
Minor repairs: Small fixes around the office.
Coffee or snacks: For employees or visitors.
Transportation costs: For short trips related to work.

Key Features of Petty Cash:

Small fund: Typically a relatively small amount, ranging from a few hundred to a few thousand dollars, depending on the business's needs.
Designated custodian: One person is usually responsible for managing the petty cash fund. This person is often called the petty cash custodian or cashier.
Imprest system: The fund is often maintained using an imprest system. This means the fund is replenished to a specific amount after expenses are made. For example, if the petty cash fund starts at $100, once expenses reduce it, the fund is reimbursed to bring it back to $100.
Receipts required: Every expense from petty cash must be supported by a receipt. This is crucial for accountability and auditing purposes.
Regular reconciliation: The petty cash custodian needs to regularly reconcile the fund, making sure the cash on hand plus receipts equals the total fund amount. This is typically done weekly or monthly.
Petty cash voucher: A documented record of petty cash disbursement. This should include date, description of expense, amount, and the signature of the person receiving the cash.

Advantages of Petty Cash:

Convenience: Quick and easy way to handle small expenses without involving larger accounting processes.
Efficiency: Saves time and effort compared to processing numerous small payments through other methods.

Disadvantages of Petty Cash:

Security risk: The cash itself is vulnerable to theft or loss.
Accounting complexity: Maintaining accurate records and reconciling the fund requires careful attention to detail.
Potential for fraud: Without proper controls, there's a risk of misuse or embezzlement.

Best Practices:

Establish clear procedures: Define who manages the fund, how expenses are documented, and how often it's reconciled.
Use a locked petty cash box: This helps to deter theft.
Maintain detailed records: Keep accurate records of all transactions.
Regularly reconcile the fund: Ensure the fund is properly accounted for.
Implement internal controls: Separate duties to minimize the risk of fraud.
Periodically audit the fund: Conduct surprise checks to ensure compliance with procedures.

Petty cash, while convenient, requires careful management to prevent problems. A well-defined system is crucial for effective and secure handling of this fund.